OVERVIEW

• The Industrial Production Index (IPI) rose to 4.2% YoY in October (Sept: 3.1%), overshooting the market expectations of 3.3% YoY. On a MoM basis, the index grew at a 7-month high of 3.9% in October.
• By category, manufacturing production edged higher to 4.2% YoY from 4.0% in September. Mining production rebounded to 3.5% YoY on higher crude oil & gas production. Electricity production rose 6.9% YoY in October.
• The weakness in exports amidst soft external demand from regional economies will likely weigh on the manufacturing output. Together with an expectation of tepid mining output, we expect IPI growth to moderate in the remaining months of the year.
• We maintain our 4Q16 GDP forecast of 4.3%, which was recently revised down from 4.7% in November. Hence, we project GDP to grow by 4.2% for the whole of 2016.

Industrial production growth as measured by the IPI accelerated to 4.2% YoY in October from 3.1% YoY (revised down from 3.2% YoY) in September. The IPI growth was higher than the market and house estimates of 3.3% YoY and 1.7% YoY respectively. On a monthly basis, the IPI rose the highest in seven months at 3.9% in October, a typical month with robust IPI growth. After seasonal adjustment, the IPI rose 0.8% MoM in October. Year-to-date, the IPI grew at a slower pace of 3.5% YoY than the 5.7% YoY registered in the corresponding period of last year. Both the manufacturing and mining sectors have experienced moderating output growth in the respective periods.

Manufacturing output, which accounts for two thirds (65.9% share) of the IPI, expanded to 4.2% YoY in October from 4.0% YoY in September. This can be attributed to stronger growth in the categories of “Electrical and Electronics Products”, “Non-metallic Mineral Products, Basic Metal and Fabricated Metal” and “Food, Beverages and Tobacco”. On a monthly basis, manufacturing output rose to 3.1% from 2.8% in September

Among the main manufacturing categories, electrical and electronic (E&E) (16.6% share of IPI), output growth quickened to 8.0% YoY in October from 6.5% YoY in September. The higher yearly growth in E&E output was largely due to a lower base comparison. On a monthly basis, E&E actually fell 1.4% after the seasonal demand for E&E peaked around 3Q16. Meanwhile, “Petroleum, Chemical, Rubber and Plastic Products” (25.4% share of IPI) experienced slower growth of 3.7% YoY from 4.4% in September, dragging the overall growth in manufacturing.

In a separate report, manufacturing sales value rose for the second month to 1.9% YoY in October (Sep: 1.1%). This indicates that an increase in demand for manufactured goods is likely a factor behind the improvement in manufacturing production. The sales value increased 1.2% MoM in October.

Mining production (28.9% share of IPI) rebounded to 3.5% YoY after a 0.3% decline in September. The crude petroleum production expanded 2.7% YoY in October (Sep: -1.5%) while natural gas production accelerated to 4.4% YoY from 1.1% in September, contributing to the stronger mining production. On a monthly basis, mining output growth rose to a seven-month high of 6.6% in October.

Electricity output (5.2% share of IPI) moderated to 6.9% YoY from 7.1% YoY in September. However, the year-to-date electricity expanded to 8.6% YoY from 2.3% posted in the corresponding period of last year.

Meanwhile, the Manufacturing PMI readings among world major economies signalled a continued gain of momentum in the global manufacturing sector. The PMI reading for the U.S. increased to 53.2 from 51.9 in October while Eurozone PMI inched higher to 53.7 in November. Among Asian countries, Japan and China manufacturing sectors remained in expansion mode with solid PMI readings of 51.3 and 50.9 respectively

OUTLOOK

Downside risks remain prevalent. Despite the better than expected IPI performance in October, we maintain a muted outlook for industrial production in the near term. Although we anticipate domestic demand to pick up towards the end of the year, the weakness in exports amidst soft external demand from regional economies will likely weigh on the manufacturing output. Together with an expectation of tepid mining output, we expect IPI growth to moderate in the remaining months of the year. We maintain our 4Q16 GDP forecast of 4.3%, which was recently revised down from 4.7% in November. For the whole of 2016, we project the GDP growth to slow to 4.2% from 5.0% registered in 2015.

Source: Kenanga Research - 13 Dec 2016